Retail REITs Say They Have Lots of Life Left -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 9, 2017).

Last week, the top mall operators delivered a blunt message to short sellers and naysayers who had expected more gloom for landlords in the bricks-and-mortar retail business: Don't count us out just yet.

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The real-estate investment trusts delivered second-quarter results that showed some resilience, with average sales productivity holding steady and occupancy rates taking a smaller-than-expected hit from retailer bankruptcies and announced store closures.

Simon Property Group Inc. and Macerich Co. reported strong re-leasing activity and a pickup in same store net operating income growth, and their shares have climbed since their results were announced last week.

"The important message is, these properties are vibrant, there's a lot of demand and we're able to execute leases that are growing our rents," said Richard Sokolov, president and chief operating officer of Simon Property Group, during its Aug. 1 earnings call. He said the landlord is opening stores from many retailers such as Untuckit, Peloton, Eloquii, Juice Generation, Muji and more.

The Indianapolis-based real-estate investment trust said there are challenges in the retail industry but that it remains confident. It raised its full year guidance on per-share funds from operations, a cash flow metric, by 4 cents after taking into account a debt charge.

Mall landlords said they are working hard to fill vacated space with tenants such as restaurants and entertainment providers that draw foot traffic.

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Taubman Centers Inc., which has the smallest portfolio of the four A-mall REITs, was the only one to reduce its full-year guidance on growth in net operating income, to 1% to 3% from 3.5%. That was in part due to its narrower re-leasing spreads -- the difference between leases that end and new leases -- as shorter lease terms, modifications and rent concessions increasingly are part of rent negotiations.

Yet those tactics can be beneficial because they keep tenants closer to current consumer tastes. Landlords such as CBL & Associates Properties Inc., for instance, said some tenants use potential store closings as a pretense to reduce their occupancy cost, but end up closing fewer stores than anticipated.

"It never ends up being what they announce," said Stephen Lebovitz, chief executive of CBL & Associates Properties, during an earnings call Friday, adding that Gordmans Stores, for instance, initially planned to close four of five stores in CBL's portfolio but ended up closing just one.

"Claims that 55% of malls will be shuttered in the near future and nearly 9,000 stores will close this year are the product of poor research and sensationalism," added Mr. Lebovitz.

Credit Suisse in a May report estimated that retailers will close more than 8,600 locations this year, exceeding the roughly 6,200 closings recorded during the recession in 2008. Credit Suisse declined to comment.

During recent earnings calls, mall landlords criticized reports that declared the end of bricks-and-mortar retail. They noted their strategies focused in drawing more foot traffic, such as in bringing in multiplex theaters, virtual-reality retailers and health clubs, as well as including more mixed uses such as entertainment, residential and office space, are working.

"I have no empathy for the incorrect conclusions that the mall is dead and that it is in late innings or demising," said Art Coppola, chief executive officer of Macerich.